Europe may shift back to coal as Russia turns down gas flows

Summary

• Germany may take 'painful' move to fire up coal power
• Italy, Austria also looking at burning more coal
• Surging gas prices add to already rising inflation

Europe's biggest Russian gas buyers were racing to find alternative fuel supplies and even looking at burning more coal to cope with reduced gas flows from Russia on Monday that threaten an energy crisis in winter if stores are not refilled.

Italy's Eni said it had been informed by Russia's Gazprom that it would receive only part of its request for gas supplies on Monday, pushing the country closer to declaring a state of alert that will spark gas saving measures.

Germany, which has also faced lower Russian gas flows, announced on Sunday its latest plan to increase gas storage levels and said it could restart coal-fired power plants that it had aimed to phase out.

"That is painful, but it is a sheer necessity in this situation to reduce gas consumption," said Economy Minister Robert Habeck, a member of the Green party that has pushed for a faster exit from coal, which produces more greenhouse gases.

"But if we don't do it, then we run the risk that the storage facilities will not be full enough at the end of the year towards the winter season. And then we are blackmailable on a political level," he said.

Russia repeated on Monday that Europe only had itself to blame for the gas crisis, after the West imposed sanctions in response to Moscow's invasion of Ukraine, a gas transit route to Europe, as well as a major wheat exporter.

The energy crisis adds to the headache for European policy makers already fretting about surging inflation in household energy bills and food prices.

The Benchmark Dutch front-month gas contract was trading at about 127 euros per megawatt hour on Monday, up more than 50% since the start of 2022.

The chief executive of Germany's largest power producer RWE, Markus Krebber, said power prices could take three to five years to fall back to lower levels, crimping household spending and weighing on the economic outlook.

Russian gas flows to Germany through the Nord Stream 1 pipeline, the main route supplying Europe's biggest economy, were still running at about 40% of capacity on Monday, even though they had edged up from the start of last week.

Eni and German utility Uniper both said they were receiving less than their contracted Russian gas volumes.

Shift back to coal 

Germany's economy ministry said bringing back coal-fired power plants could add up to 10 gigawatts of capacity in case gas supply hit critical levels. A law related to the move goes to the upper house of parliament on 8 July .

Alongside a shift back to coal, German measures will include an auction system starting in the coming weeks to incentivise industry to consume less gas and financial help for Germany's gas market operator, via state lender KfW, to fill gas storage facilities faster.

Austria's government agreed with utility Verbund on Sunday to convert a reserve, gas-fired power plant to produce electricity with coal should restricted gas supplies from Russia result in an energy emergency.

Germany and Italy are among the most reliant on Russian gas, but other European countries have also faced gas supply shortages while consumption has risen unusually high for the time of year after a heatwave boosted use of air conditioning.

Gazprom did not immediately respond to an emailed request for comment on its supplies to Italy.

Kremlin spokesperson Dmitry Peskov said on Thursday that reductions in supply were not premeditated and were related to maintenance issues. Italian Prime Minister Mario Draghi has dismissed this explanation as a lie.

Italy, whose technical committee for gas is due to meet on Tuesday, has said it could declare a heightened state of alert on gas this week if Russia continues to curb supplies.

The move would trigger measures to reduced consumption, including rationing gas for selected industrial users, ramping up the production at coal power plants and also asking for more gas imports from other suppliers under existing contracts.